Setting a Price is a Delicate Balance for Small Businesses

For years, Wendy Coulter resisted consultants? cries for her to raise the price of services offered by her firm, Hummingbird Creative Group.

But when she finally gave in, the experience made her a believer.

?The biggest lesson I would give anybody out of everything that I learned is not to be afraid to up your rate, because people will take you more seriously and you will get better work,? said Coulter, president of the 18-year-old Cary marketing firm, which offers branding and other services, including pricing strategy. ?If your rate is too low, people don?t take you seriously. They think something is wrong, or they think you are going to take too much time, or they just don?t feel like you have the right level of experience or you would know what you should be charging.?

Pricing strategies for small-business owners offering services involve more than just figuring out how much they should charge, but requires establishing a process that determines their place in the market and whether they can raise cash to fuel their business.

Often, small-business owners will set their pricing by guessing what they think they should charge, said Kevin Bassett, with Bassett & Byers, a Raleigh, N.C., certified public accountant firm that specializes in small and midsize companies.

?The important thing is that they actually develop a pricing strategy,? Bassett said. ?They will be a lot more profitable and be a lot more successful if they do that.?

First, owners need to capture all of their business costs and set up an accounting system that can be monitored daily, Bassett said, not once a year before they hand it over to their accountant.

?One of the dangers is that a small-business owner may not know what their costs really are,? Bassett said.

Bassett once worked with a roofer who calculated prices by adding the cost of shingles and the rate he paid his employees.

?He was putting his prices just above that, but he was completely forgetting about payroll taxes, insurance, trucks and fuel,? Bassett said.

In addition, he didn?t have a daily accounting system that would have reflected his bad math. ?So he was actually losing money on every job, and he didn?t know it,? Bassett said.

Owners often forget about employee-related taxes along with telephone, internet and overhead costs. Those costs should be totaled, divided by the number of clients the business serves and incorporated into the service price, Bassett said.

Costs should be added to show how much owners need to bring in each month to break even, which will help them set a minimum sales goal.

Next, owners need to evaluate their competitors? pricing and determine where they want to their business to land on their specific market?s pricing spectrum. Often, owners start out offering the lowest price, but quickly learn that it?s tough to compete with big businesses. They also face the pitfalls of working with clients who harp on price and are ready to switch if they don?t get the price they?re seeking.

?Since small companies are more nimble, a lot of times it would be easier to compete on customer service and quality? and offer a price that is competitive but not the low-cost leader.

There are many different strategies to raise revenue in a service company, Bassett said. Those options include bundling services; converting a service into a tangible product, such a client tax plan, a comprehensive estate plan, or a branding plan; and quantifying the value of a firm?s services and comparing it to how much the customer is actually paying.

?So you are showing them the real dollars and the savings they are getting by buying your services,? he said.

Other pricing strategies include retainers; sending clients reminders for recurring services such as pet shots or an oil change; and charging a premium when the business is busy and discounts when it is slow.

Meanwhile, small-business owners need to monitor competitors? pricing and any changes in the cost of supplies.

Annual price increases are healthy, Bassett said, and studies show that up to 5 percent increases will generally pass without protests from customers.

Coulter started freelancing in 1995 for $25 an hour.

After more than a year, she increased her rates to about $45 an hour after talking to some advisers, who were pushing her to raise her rate to $50 or $60.

?I couldn?t bear it, so I went somewhere in between,? she said.

In 2001, Coulter met with an accountant, who helped her understand her cash flow and financial statements and build a sustainable pricing strategy.

?That was like the key turning point for my business in every way because I had a lot of issues with bills I needed to pay,? she said.

The accountant helped Coulter to better understanding the pricing in her market, convinced her to increase her hourly rate up to $75 an hour, and encouraged her to establish retainer offerings.

?It really impacted my business in a very positive way because I could predict every month what money was guaranteed to come in the door,? she said.

Over time, Coulter upped her minimum retainer from five hours to 20 hours a month. Her hourly rate is up to $150.

Richard Trumper, president of Mid Carolina Contracting, a remodeling contractor in Raleigh since 2006, boasts that he has only gone over his contract budget once.

?Most of our clients come in between 3 and 5 percent under budget,? he said. Pricing and transparency drive customers in Trumper?s remodeling marketplace, he said, and that?s why his company will take the time measuring all aspects of the work and spend hours plugging that information into software that will help him identify and break down the costs for his clients.

?If we get the budget right on the front end, and in seven years I think has proven that we are able to hit that mark for our client, the making money side isn?t that hard,? he said.

PRICING IDEAS:

?Bundle services by offering multiple options for one price, such as combining monthly lawn maintenance with annual fertilization and aeration.

?Convert services into a tangible product or deliverable, such a client tax plan, a comprehensive estate plan or a branding plan.

?Quantify the value of a firm?s services versus how much the customer is actually paying, such as showing how a tax plan could be saving a client thousands of dollars, but they are paying less than that for your service.Source:? MCT Information Services